Download Key Concepts: Graphs and Formulas to KNOW: *Production

AP Macroeconomics
Vocabulary Terms to Know
Unit VI: International Trade and Finance
UNIT VI: INTERNATIONAL TRADE AND FINANCE
A. Balance of payments accounts
1. Balance of Trade
2. Current account
3. Capital account
B. Foreign exchange market
1. Demand for and supply of foreign exchange
2. Exchange rate determination
3. Currency
C. Net exports and capital flows
D. Links to financial and goods markets
E. Free trade and protectionism
Key Concepts:
U.S. and world trade, absolute and comparative advantage, balance of payments, foreign
exchange markets, implications of foreign trade, effects of domestic fiscal and monetary
policies on capital flows and foreign exchange markets, use of resources, decision and policy
making.
Graphs and Formulas to KNOW:
*Production possibilities frontier
*Outward shift represents growth.
*Inward shift represents shrinkage of an economy.
*The more increase in capital goods; the more an economy
can produce in the future.
*International trade allows countries to produce outside of
their domestic PPF.
*Understand comparative advantage (produce using the least opportunity
cost) vs. absolute advantage (produce using the least resources). Country
should specialize in the good it has comparative advantage in, regardless
of whether it has an absolute advantage or not.
*Calculate ratios for trade: ie. Great Britain gives up 2 units of steel for
every 1 unit of wheat it produces. The U.S. gives up 1 unit of steel for
every 1 unit of wheat it produces. While the U.S. has an absolute
advantage in both products (because it can make more of both), it should
specialize in the production of wheat (as it only gives up 1 unit of steel).
*Aggregate supply/aggregate demand model and world trade
*Foreign exchange market (FOREX)
It follows the rules of supply and demand:
*If the supply of currency Y increases (shifts to the
right) the price of currency Y will fall relative to
currency X. (Currency Y will depreciate in value.)
*If the demand for currency Y increases (shifts to the
right), the price of currency Y will rise relative to
currency X. (Currency Y will appreciate in value.)
*Lorenz Curve: Shows distribution of wealth in an economy.
*The Gini Coefficient:
The Gini coefficient is often used to measure income inequality. Seen in the Lorenz Curve, 0
corresponds to perfect income equality (i.e. everyone has the same income) and 1 corresponds to
perfect income inequality (i.e. one person has all the income, while everyone else has zero
income).
*HDI: Human Development Index is a composite statistic of life expectancy, education, and
income indices used to rank countries. 0 represents the poorest of the poor, while (1) represents
the ultimate in development. Used by the United Nations to classify countries.
*Developmental diamond: Experts at the World Bank use so-called development diamonds
to portray relationships among four socioeconomic indicators for a given country relative to the
averages for that country’s income group (low-income, lower-middle-income, upper-middleincome, or high-income). Life expectancy at birth, gross primary (or secondary)
enrollment, access to safe water, and GNP per capita are presented, one on each axis, then
connected with bold lines to form a polygon. The shape of this “diamond” can easily be
compared to the reference diamond (see colored diamonds), which represents the average
indicators for the country’s income group, each indexed to 100 percent. Any point outside the
reference diamond shows a value better than the group average, while any point inside signals
below-average achievement.
Net Exports and International Finance
1) international finance: The field that examines the macroeconomic consequences of the financial flows
associated with international trade.
2) quota: A ceiling on the quantity of specific goods and services that can be imported, which reduces world
living standards.
3) tariff: A tax imposed on imported goods and services.
4) balance of payments: The balance between spending flowing into a country and spending flowing out.
5) balance on capital account: The balance between rest-of-world purchases of domestic assets and domestic
purchases of rest-of-world assets.
6) balance on current account: Spending flowing into an economy from the rest of the world on current
account less spending flowing from the nation to the rest of the world on current account.
7) capital account: An accounting statement of spending flows into and out of the country during a particular
period for purchases of assets.
8) capital account deficit: A negative balance on capital account.
9) capital account surplus: A positive balance on capital account.
10) current account: An accounting statement that includes all spending flows across a nation's border except
those that represent purchases of assets.
11) current account deficit: Situation that occurs when spending for goods and services that flows out of the
country exceeds spending that flows in.
12) current account surplus: Situation that occurs when spending flowing in for the purchase of goods and
services exceeds spending that flows out.
13) commodity standard system: System in which countries fix the value of their respective currencies
relative to a certain commodity or group of commodities.
14) currency board arrangements: Fixed exchange rate systems in which there is explicit legislative
commitment to exchange domestic currency for a specified foreign currency at a fixed rate.
15) fixed exchange rate system: System in which the exchange rate between two currencies is set by
government policy.
16) free-floating exchange rate system: System in which governments and central banks do not participate in
the market for foreign exchange.
17) managed float: Government or central bank participation in a floating exchange rate system.
Economic Development
18) developing country: A country that is not among the high-income nations of the world.
19) least developed country (LDC): A country that is very poor and still developing – Lowest income.
20) economic development: A process that produces sustained and widely shared gains in per capita real GDP.
21) Malthusian trap: A point at which the world is no longer able to meet the food requirements of the
population, and starvation becomes the primary check to population growth.
22) demographic transition: Situation in which population growth rises with a fall in death rates and then falls
with a reduction in birth rates.
23) Dependency theory: The idea that poverty in developing nations is the result of their dependence on highincome nations.
24) import substitution: A strategy of blocking most imports and substituting domestic production of those
goods.
25) export promotion: Export promotion: A strategy of promoting the exports of a country through subsidies,
etc.
26) Barriers to trade: The use of tariffs (taxes on imports), import quotas (limits on # of imports), licensing
rules/administrative barriers (governmental rules that make it more difficult for importers), government
subsidies (a type of export promotion), Voluntary Export Restraints (VER – a country “agrees” not sell a
good in another country – usually not so “voluntary”) and embargoes (a complete ban on trade with a
country). All of these are protectionist policies and are used to limit foreign competition for domestic
companies. All create less choice for consumers and higher prices for consumers.
Socialist Economies in Transition
27) labor theory of value: Theory that states that the relative values of different goods are ultimately
determined by the relative amounts of labor used in their production.
28) surplus value: The difference between the price of a good or service and the labor cost of producing it.
29) transitional country: A country that has changed from a command economy to a market economy.